United Said to Restart Talks With US Airways

Tuesday

For the last five years, Glenn F. Tilton has talked often about the need for mergers and consolidation in the airline industry, hanging out the equivalent of a “for sale” sign at his troubled United Airlines.

But like many frustrated home sellers these days, Mr. Tilton, United’s chief executive, has found no takers so far.

After seeing its latest prospect slip away on Sunday with the decision of Continental Airlines to end merger talks, United restarted discussions with US Airways about a possible deal, according to people with direct knowledge of the negotiations.

The two airlines talked during the last few months, but the negotiations took a back seat so that United could explore a deal with Continental. A deal now between United and US Airways is far from certain, however.

Analysts said Monday that US Airways was less attractive to United than Continental, whose hubs in Houston and Newark would have complemented United’s operations in Chicago. By contrast, United and US Airways both have extensive service to Washington and might have to cut flights there. But the cuts both airlines made while under bankruptcy protection could make the deal easier to carry out.

After Continental’s board rejected the idea of a merger late Sunday, saying that the risks outweighed the possible benefits, Mr. Tilton told employees on Monday that the reasons for a merger remained valid.

United continues to believe that “new business models are required to respond to the challenging market environment,” he said in a recorded message. “For a shift of that magnitude, management teams must fully embrace the inevitability of change and have a meeting of the minds for any prospective partnership to be successful.”

Despite spending more than three years in bankruptcy, United’s costs remain high compared with those of other major airlines. Its planes generally carry fewer passengers than other airlines, and it has a contentious relationship with its unions, especially its pilots.

In recent months, United has held talks of varying seriousness with Northwest Airlines and Delta Air Lines — which are pursuing their own merger — as well as Continental, which backed out after the managers of the two airlines had ironed out all the major issues of a deal.

United officials said Monday that they were not surprised by the 11th-hour decision, given Continental’s preference to remain independent, and they said United’s financial condition was not a factor.

But other industry executives and airline analysts said United’s $537 million first-quarter loss gave Continental a reason to back out.

It was the biggest loss during the quarter for the major airlines, and it caused United’s stock to plummet. The shares fell another 40 cents Monday, to $14.81.

Given the first-quarter loss, some industry experts questioned United’s decision to pay a special dividend in January of $2.07 a share, totaling about $250 million, at a time when airlines are looking for ways to conserve cash.

United took the step after paying back $3.6 billion in debt, Jean Medina, a company spokeswoman, said Monday. She noted that the company still had nearly $3 billion in cash, as well as $3 billion in assets like planes, engines and other property that it could sell to raise money.

Still, Philip A. Baggaley, a senior credit analyst with Standard & Poor’s Ratings Services, said, “It would be nice to have that cash at this point.”

United, like many airlines, is facing pressure to stay in compliance with covenants on bank loans.

Last week, United’s chief financial officer, Frederic F. Brace, noted that the airline was well within the requirements set by its lenders, including JPMorgan Chase, Citigroup and Credit Suisse.

But he acknowledged that United faced cost challenges that prompted it to make another round of cuts in costs and jobs, on top of those it undertook while in bankruptcy protection.

Analysts were particularly concerned that one main measurement, the cost per available seat mile, rose nearly 16 percent in the first quarter, compared with 2007. United said the increase reflected a 50 percent rise in the cost of jet fuel, but the jump in seat-mile expense was greater than competitors reported.

In an earlier era, it was relatively simple for an airline to gain a waiver from a lender or to renegotiate loan terms. But as with many such transactions, United’s debt upon emerging from bankruptcy in 2006 was syndicated to hedge funds and other investors. They, like the banks, have found themselves under financial stress, from the housing crisis and other problems in the economy.

Likewise, United left bankruptcy anticipating that oil would cost $50 a barrel through 2010, less than half its current price. Should United’s finances worsen, industry officials warned that it might not get the automatic pass it could have expected only a few months ago. United officials said they were confident they could work out any issues.

At US Airways, Mr. Tilton has a kindred spirit in its chief executive, W. Douglas Parker, who led America West before it merged with US Airways in 2005.

Mr. Parker, for his part, knows the sting of embarrassment that comes from a deflected bid. Last year, Delta, which agreed last week to merge with Northwest, turned down a hostile offer from US Airways.

“You at least have two willing partners, and that could be important, given that the clock is ticking,” Mr. Baggaley said. “If they are going to have a merger, they better announce it soon.”

One reason for the fast timetable is the desire of airlines to have their deals considered by the Bush administration rather than risk a rejection by a new president.

But a United-US Airways deal has already been turned down once by the Bush administration, in 2001, when the Justice Department vowed to sue if the merger went through. The prospect prompted them to call it off.

That was before the industry was pummeled by a wave of bankruptcy filings, including two at US Airways and another at United, and soaring fuel prices. Those fuel costs were a main reason cited by Delta and Northwest for their merger.

Delta and Northwest have said they do not plan extensive cuts once their merger takes effect, a reason some analysts believe their stocks have not climbed.

But investors would cheer a deal in which airlines seriously restructure their operations rather than glue them together, said James B. Lee, vice chairman at JPMorgan Chase, who has advised Mr. Tilton since he has been at United.

Mr. Lee said investors would be eager to participate in a merger of two carriers that took a serious approach to restructuring their operations rather than simply combining them. “You could take that kind of a combination on the road” — raising equity and paying down debt — “and tell a fascinating global growth story. You would end up with a real company with a real balance sheet,” he said. “To me, that’s the vision here.”

Mr. Tilton’s push for consolidation may be hampered by more than its finances. The airline also has a difficult relationship with its unions — another reason Continental officials shied away from a deal, according to an executive who declined to be identified because the situation was sensitive.

The union called on Mr. Tilton and other United managers to reject their compensation in light of the first-quarter results and “this management group’s inability to find a suitable merger partner.”

But Mr. Tilton said in his message Monday that the airline had a strong balance sheet. Its performance over the last 12 months, he said, had given United “a solid foundation to manage through the complexities of this current economic environment.”

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.